How the tables are turned. As the UK tips back toward recession and the eurozone hovers on the brink of implosion, the UK Chancellor of the Exchequer George Osborne hurried off to the former British colony of Hong Kong this week to drum up business for the City of London as a future trading center for the Chinese currency. On Tuesday he was in Beijing to lobby China to do what neither the British private nor public sector is prepared to do — invest in crisis-ridden Britain.
The chancellor’s quest follows the EU’s fruitless attempt to convince China to use some of its colossal reserves to back the eurozone’s bailout fund. Given the relative performances of the European, US and Chinese economies in recent years, it’s not hard to see why Western politicians now feel the need for Chinese support.
It’s a commonplace that China is the world’s emerging economic giant. After 30 years averaging more than 9 percent annual growth, China is now the world’s second-largest economy and its fastest-growing market. Hundreds of millions of Chinese have been taken out of poverty, as its international share of manufacturing has risen from 2 percent to 20 percent in 20 years.
However, it has been the slump in Europe, the US and Japan that has most dramatically underlined the yawning gap in performance between the world’s long-established economic powers and China.
In the four years from 2007 to last year, US national income increased by less than 0.6 percent (the figure is still being revised down), the EU shrank by 0.3 percent and Japan declined by 5.2 percent. In the same period, despite the decline in export markets in those economies, China grew by more than 42 percent.
There is a deep reluctance in the austerity-afflicted Western world to consider the reasons for such an astonishing gap. Europe is already heading ever deeper into the second phase of the crisis that erupted in 2007-2008, now centered on the eurozone.
When the credit agency Standard & Poors downgraded nine states’ creditworthiness and the eurozone bailout fund, warning that “fiscal austerity alone risks becoming self-defeating,” German Chancellor Angela Merkel’s response was to press for the adoption of even tighter austerity.
It is a recipe for economic disaster. Meanwhile, Western analysts are predicting that China is heading in the same direction — as they have consistently and wrongly done for the past decade, but especially since the crash of 2008. The latest predictions of a “hard landing” for China focus on inflationary pressure, a legacy of bad bank loans, an overheated housing market and the impact of stagnation or worse in Europe and the US.
Maybe the pessimists will be proved right at last, but there are powerful reasons to suggest otherwise. Chinese growth for last year was 9.2 percent, compared with forecasts for Britain of about 1 percent. It’s expected to drop back this year to between 7 percent and 8 percent — the kind of crisis to dream of. Last year’s inflation is cooling off, as is the property bubble which, unlike in the US and UK, was funded by savings rather than borrowing.
As the Shanghai-based British economist John Ross argues, China has a strong record of absorbing bad loans in the wake of the 1997 Asian debt crisis and is cushioned from the collapse in Western demand by the fact that most of its trade is with the developing world.